Living the Chimerican dream

Commentary: Structural changes are essential to global growth

By

MichaelCasey

Columnist

Reuters

NEW YORK (MarketWatch) — Is Chimerica back?

That imaginary hybrid of the world’s two biggest economies, nicknamed as such in an influential 2007 essay by historian Niall Ferguson and economist Moritz Schularick, is showing signs of revival. Economic data from both the U.S. and China have improved, more or less in tandem, even as Europe and Japan’s situations have worsened.

For now, that should be a relief to those other struggling parts of the world as U.S. and Chinese demand spills over into their economies. And in the medium term it could benefit the dollar, which until China properly liberalizes the yuan is ostensibly Chimerica’s common currency. What we don’t want is for this trend to entrench the same debt-driven co-dependent Chinese-U.S. relationship that Ferguson and Schularick described five years ago. That could create untenable financial imbalances, just as it did in 2008.

Obama comments on ‘fiscal cliff’

(4:37)

During a press conference Wednesday, President Obama spoke about the approaching fiscal cliff and reiterated the need for bipartisan cooperation.

After a sluggish 2011 and an even weaker first half of this year, East Chimerica — as the academic duo dubbed China — is firing up its traditional drivers of growth: construction, manufacturing and selling stuff to other countries. Chinese property development investment, industrial production and exports now all are showing strong on-year growth rates.

The West Chimericans are perhaps returning to what they do best, too: spending. It is a far cry from the binges of the pre-2008 era, but U.S. consumers seem more willing to open their wallets of late — at least when they aren’t battling natural disasters.

Encouraged by a long-awaited upturn in housing prices and record-low interest rates, consumers registered their most upbeat sentiment rating since before the crisis last month, according to a University of Michigan/Reuters index. And although disruptions from superstorm Sandy caused retail sales to drop 0.3% last month, that result doesn’t detract from the impressive 1%-plus gains posted consecutively in August and September. One key factor: consumer credit this year has started growing again, according to the U.S. Federal Reserve. Read “U.S. retail sales retreat in October.”

It has all the hallmarks of the old Chimerican growth cycle. Chinese save, invest in property, and produce a surfeit of clothes, toys, electronic gadgets and other things. These are then sold to Americans, who buy them with credit, a large part of which is ultimately financed with Chinese savings. As this merry-go-round of money cranks up, the rest of the world gets to ride along — and we now are seeing early signs of that in export and production data from countries such as South Korea and the Philippines.

This is all good until the imbalances in the Chimerican relationship — China’s savings rate versus America’s spending — reach a breaking point. That is what happened before 2008 when under-regulated Wall Street banks used those international finance flows to pay for an orgy of risky bets.

Thankfully, the same kind of bubble-bursting meltdown that followed is unlikely to be repeated soon. Post-crisis asset write-downs have greatly diminished the leverage in the financial system and banks are burdened with stricter regulations. The dollar’s modest gains versus the yuan since 2008 have reduced the imbalances as recent trade data showed U.S. exports to China picking up. And with Beijing manipulating its currency less heavily, China’s foreign reserves aren’t growing so fast, which means the price-distorting flow of money into U.S. credit markets isn’t as strong.

But by other measures, the world is even more fragile. Europe and Japan are a drag on global growth, whereas five years ago they were in a healthier state. Even if the euro zone remains intact, we now know that the price for that union is a crippling, continent-wide recession. Japan, meanwhile, saw its economy contract by 3.5% last quarter. And with public debt at 220% of GDP, Japan’s dilemma exemplifies that of all advanced countries: governments are now too indebted to unleash fiscal stimulus.

If Chinese-U.S. expansion doesn’t accompany a reorienting in the Chinese economy toward consumer-led growth and a more export- and investment-driven expansion in the U.S., it may not last very long. Without these structural changes, the absence of healthy, core demand growth elsewhere will hold investors back and they will in turn hold back the global economy.

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